Key Takeaways
- The Coalition plans to lower gas prices by diverting LNG exports to the domestic market and investing in new gas infrastructure.
- Accelerated gas project approvals may not impact prices as it takes years for new projects to produce gas.
- A reservation policy and demand management could ensure stable domestic gas supply and reduce energy costs.
As part of its budget reply last night, the Coalition promised to push down gas prices by diverting east coast LNG spot exports into the domestic market.
The Coalition also intends to unlock ‘bucketloads’ of new gas by ensuring faster project approvals and through taxpayer investments in new gas infrastructure.
Diverting LNG exports will, in the immediate term, undoubtedly put downward pressure on gas prices and help to east cost of living pressures.
The impact of faster gas approvals on gas prices in the short term is less certain. The economic premise of the Coalition’s plans, as outlined by Coalition MPs, is that increasing gas production will push down prices.
The reality on the east coast, however, is that accelerating approvals is highly unlikely to make a meaningful difference this decade.
This is because only a limited number of projects could actually benefit from faster approvals from the federal government, which has oversight of offshore gas developments. (Onshore gas approvals sit with the states and territories.)
The Coalition has already flagged its intention to fast track Woodside’s North West Shelf project, but this gas will be sold either into Western Australia or into export markets for liquefied natural gas (LNG), rather than to the east coast. This project also faces adverse economic realities that could very well undermine its financial returns.
On the east coast, the Coalition’s policy is likely to target new developments in offshore Victoria. This makes sense given the proximity of these projects to major demand centres.
Existing infrastructure also means they are likely to have a stronger business case than projects in remote basins that require new infrastructure, such as the North Bowen and Beetaloo basins. Investors may therefore be more prepared to back such projects given the lower asset-stranding risks.
The real question, however, is whether the Coalition’s policy will bring new Victorian gas projects to market quickly. Generally, it takes two to five years for a project to deliver gas once it has been issued a production licence, and potentially much longer for projects in the exploration and appraisal stage.
That is to say, the Coalition’s policy may not lead to much new gas production in the next few years. Even if it did, there is no guarantee that new gas supply would actually be supplied to the domestic market in quantities that would drive down prices.
In the decade since LNG exports from Queensland began, east coast gas production has more than doubled. Over the same period, gas prices have tripled and non-LNG domestic gas consumption has fallen materially.
Figure: Increasing east coast gas production has not helped the domestic gas market
Sources: Australian government, Australian Energy Regulator (AER), IEEFA analysis.
The reason for this is that the LNG sector has soaked up all of this new gas supply (and then some) in order to maximise exports. Some of the Queensland LNG projects continue to export more gas than required to meet their long-term contracts, even as the LNG exporters have shifted from net contributors to the domestic market to net withdrawers.
In aggregate, the three LNG projects – Queensland Curtis (QCLNG), Gladstone (GLNG) and Australia Pacific (APLNG) – continue to operate below their export capacity, meaning LNG exports could be increased if more gas was available, allowing LNG exporters to increase utilisation of their export facilities.
Indeed, Santos’ GLNG project may also be looking for new gas supplies due to the looming expiry of contracts under which it buys gas from Australia Pacific LNG and AGL.
This is where the Coalition’s consideration of a reservation policy alongside fast tracking gas approvals comes in, with the intention being to ensure sufficient domestic gas supply over the longer term.
Western Australia’s reservation policy, which requires LNG exporters to supply 15% of gas reserves to the domestic market, is no doubt front of mind for the Coalition, and for good reason.
Despite most LNG exporters being well behind on their domestic supply commitments, Western Australia has managed to avoid the highly challenging market conditions seen on the east coast.
However, whether a longer-term policy to spur new gas production will improve longer-term gas supply will ultimately depend on how much new production is achieved, and when.
This is different, of course, from the Coalition’s proposal to divert existing gas production to the domestic market, which as noted earlier is certain to put downward pressure on prices provided the Queensland LNG exporters do not lower production in response. (The Queensland LNG exporters effectively control 90% of the east coast’s gas reserves).
While bringing this gas down to southern demand centres would require infrastructure upgrades, pipeline operator APA Group has already announced a capacity expansion on key pipelines connecting Queensland and the southern states.
The Coalition’s policy misses a key opportunity, however, to ease cost-of-living pressures and help with gas availability. That is, demand management presents another option.
Victorian households use substantial amounts of gas for space and hot water heating, and for cooking. However, rapid residential electrification, using more efficient electrical appliances, would slash gas demand while also reducing household energy bills.
IEEFA has also identified large untapped opportunities to deploy heat pumps in industry, in particular in the food and beverage sector, which is a large gas user in Victoria.
This could deliver large decreases in gas demand while only driving small increases in electricity use, and would reduce overall energy costs for businesses. There is a clear role for governments to do more to help households and industry make the switch away from gas.
While it is encouraging that the need for domestic supply is finally being recognised, there is more that can be done to lower gas consumption and household energy bills permanently, without relying on continued investment from a handful of LNG exporters.
Josh Runciman is IEEFA’s lead analyst for Australian gas
